Business Decision Making: Payback Period and Net Present Value Analysis

This document discusses business decision making using payback period and net present value analysis. It presents a case study of DDK Plc investing in belts and trainers, and recommends the best investment choice based on the analysis. The document also highlights the financial factors (income, fixed assets, inventory, sales activity) and non-financial factors (legislation compliance, effective relationships, business reputation) to consider in decision making.

Essay on Business decision making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................2
Payback period.............................................................................................................................2
Net present value.........................................................................................................................3
Financial factors...........................................................................................................................5
Non-financial factors...................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
In the current times, most of the businesses are relied upon business decision making
application which provides better results and choosing best path of investment. Similarly, the
present study is based upon the DDK Plc is operating in UK and now invest in another areas i.e.
belts and trainers. For that two different investments done along with net cash flows, therefore,
for better decision making, study suggest best investment by applying NPV and Payback period.
Further, it evaluate different financial and non-financial factors used for better decision.
Payback period
For project A
Initial investment
170000
Year Net cash flow Cumulative Cash flow
1 45000 45000
2 45000 90000
3 35000 125000
4 70000 195000
5 82000 277000
3 170000 – 125000 = 45000
= 45000 / 70000 = 0.6
Pay back period 3.6 years
For Project B
Initial investment
190000
Year Net cash flow Cumulative Cash flow

1 50000 50000
2 45000 95000
3 70000 165000
4 90000 255000
5 90000 345000
3 years 190000 – 165000 = 25000
25000 / 90000 = 0.3
Pay back period 3 years 3 months
Interpretation: As per the above table, it can be interpreted that DDK Plc should invest upon
trainers i.e. Project B. it is so because company get its amount back within 3 years and 3 months.
On the other side, in the case of Project A i.e. Belt company get amount within 3 years and 6
month which is delay by 3 months from project B. So, it can be stated that manager must invests
upon Project B, as it helps to get amount within limited tenure which is more beneficial for a
firm (Sreejith, Rani and Mansani, 2021).
Net present value
For project A
Discounted rate = 14%
Yea
r Net cash flow
PV factor @
14% Discounted cash inflows
1 45000 0.877 39474
2 45000 0.769 34626
3 35000 0.675 23624
4 70000 0.592 41446
5 82000 0.519 42588
Total discounted cash inflows 181758

Less: initial investment 170000
NPV 11758
For Project B
Discounted rate = 14%
Yea
r Net cash flow PV factor @ 14% Discounted cash inflows
1 50000 0.877 43860
2 45000 0.769 34626
3 70000 0.675 47248
4 90000 0.592 53287
5 90000 0.519 46743
Total discounted cash inflows 225764
Less: initial investment 190000
NPV 35764
Interpretation: Through the above table, it can be stated that project B help to generate highest
profit as compared to Project A. Therefore, it is suggested to the company to proceed with
Project B and invest upon trainers because within 5 years it provide 35764 which is greater than
project A. Moreover, the initial investment for trainer is £190000 whereas for project A the amount is
£170000 is invested but the output is lower. Therefore, it can be stated that for generating profit,
company should choose project B because the chances of profit is higher with this project
(Gaspars-Wieloch, 2019).

Financial factors
In order to invest within new business, it is suggested to the company to consider
financial factors that helps DDK Plc to meet the defined aim. These are as mentioned below:
 Income: Before any investment, it is essential for the company to consider the net
income from last many years. With the help of this, company identified whether it should
invest upon other projects or not.
 Fixed assets: Company can invest upon fixed assets but make sure that it does not
invested too much (Almansour, Almansour and Almansour, 2019). It is so because it does
not help to get any amount in return of it, because fixed assets are always depreciated and
do not offer any amount on behalf of sale. That is why, there is a need to consider such
financial aspect before any investment.
 Inventory: It is essential to monitor the inventory of a business because it affect the
business performance in opposite manner. Excessive inventory may be obsolete and
waste the amount which was already invested. That is why, business should always carry
lowest level of inventory because it provide positive results. Sales activity: One of the most important financial factor which reflect that company
must track the sales activity within each quarter in order to determine the reason of lower
down the sales (Zain and Shafii, 2018). By identify the same, implement the strategy that
assist to improve the sales activity in order to generate better outcomes.
Non-financial factors
There are many non-financial factors which need to be considered by DDK Plc before
making any decision. Some of them are as mentioned below:
 Comply with legislation: In order to invest within new business, it is suggested to the
firm to comply with all mandatory legislations that helps to meet the defined aim. So,
meeting the requirement of current and future legislation, helps a business in its smooth
functioning (Dobrovic and et.al., 2018).
 Effective relationships: DDK Plc wants to invest either in Belt or trainer. For that, it is
necessary to maintain the relationship with suppliers and customers. Therefore, by
offering discounts company is able to lead longer relationship with customers and causes
positive impact upon brand.

 Business reputation: Diversification helps a business to improve the brand image of a
firm and in the same way, DDK Plc is also investing into new projects. Being a brand
image at UK will assist the firm to improve the overall brad image at global level. Also,
investing into new business also assist company to gain high customer base and improve
profitability.
CONCLUSION
By summing up above it has been concluded that DDK Plc should invest in Project B i.e.
trainers because it provide amount within a limited period as compared to project A. on the
other side, as per the NPV the value of project B is higher which means only Project B will
generated 35764 within 5 years. Along with this, company should also consider financial factors
like fixed assets, inventory, sales activity and net income . Further, DDK Plc must consider non-
financial factors like reputation, relationship with customer etc in order to make better decision
for the company’s welfare.

REFERENCES
Books and Journals
Almansour, B., Almansour, Y. and Almansour, A., 2019. Small and medium size enterprise:
Access the financial and non-financial factors. Management Science Letters. 9(5).
pp.687-694.
Dobrovic, J. and et.al., 2018. Non-financial indicators and their importance in small and
medium-sized enterprises. Journal of Competitiveness. 10(2). p.41.
Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty. Central
European Journal of Operations Research. 27(1). pp.179-197.
Sreejith, S., Rani, M.A. and Mansani, S., 2021. Estimation of Payback Period Incorporating SVC
and TCSC in SCUC Problem. In Advances in Smart Grid Technology (pp. 335-352).
Springer, Singapore.
Zain, S.N.M. and Shafii, Z., 2018. The impact of Shariah governance to financial and non-
financial performance in islamic financial institutions (ifis): A literature
survey. International Journal. 3(2). pp.27-40.